How to Pick Winners Like a Pro

(featured in the Cincinnati Business Courier)

Imagine you fail 8 out of 10 times at work.

You would be searching for a new job, right?

But not if you’re a venture capitalist. In the world of investing in start-up companies, failing 80 percent of the time is, oddly enough, typical. How so?

Venture capitalists are known for asymmetric returns. Translation: They often make enough profit on the 20 percent of their winning investments to more than cover the losses on their bad investments.

That’s why venture capitalists care more about homeruns than strikeouts.

Because if they invest in an unsuccessful company, they lose 1X their money. But if they fail to invest in a runaway success, they may lose 10X, 20X or more in missed profits.

Benchmark Capital is best known for not missing the boat. They invested $6.7 million in a small, fledging online auction company back in 1997. When eBay went public two years later, Benchmark was sitting on a $5 billion pay day.

For venture firms, the formula for success is simple: magnitude beats frequency. The contrast between several small wins and a mega, category-defining win is the difference, in the words of Mark Twain, between the lightning bug and lightning. ?

Lest you think venture capital is a mythical world unimportant to main street, consider this fact: 60 of the largest 300 public companies in America have roots in venture capital. Plus, many early venture-backed companies have grown into global leaders in their respective domains, including Apple, Microsoft, Amazon, Google, SpaceX and Nvidia.

Three-Step Guide

Sure, the world of founders and funders may seem unfamiliar to the uninitiated. But the venture mindset is wide and wise enough to apply to other domains—such as strategy, innovation and leadership. To stay ahead of the pack, here's your three-step guide to picking winners like a pro.

Prepared Mind. The best venture capitalists prepare for founder meetings like they are training for the Olympics. They want entrepreneurs to experience not just their expertise but also their foresight—namely, their uncommon ability to see around corners. That elite level of anticipation comes from only one place: a more extreme level of preparation. ?

For the prepared mind, everything communicates. When you show up. How you show up. Your questions. Your answers. Your biases. Your curiosity. Your hustle. You want founders to depart every meeting believing the same thing: These folks across the table are more than prepared to help me win the future.

Importantly, preparation is synonymous with patience. Research shows venture capitalists say no, on average, to more than 100 investment opportunities before saying yes to a single one.

Pro tip: Show how much you care by how hard you (over) prepare.?

Murder Board. The aim of a murder board is simple: charge a small group of strategic thinkers with stress-testing the durability of an idea—to poke holes, identify gaps and explore alternatives. The concept originated in military circles as a formal way for groups to play devil’s advocate.

Venture capitalists turn this licensed skepticism into a playbook for assessing deal flow. Every opportunity gets scrubbed—and scrubbed again. And no founder gets to pass go without answering two deceptively profound questions. Who cares? Why now? The better the answers, the higher the probability of landing an investment.

Pro tip: No conclusion should go untested. ??

Underdogs. “Hungry over-achievers with a deep-rooted need to win.” That’s how Sequoia Capital describes their investment targets. They thrive on working with underdog founders for whom the status quo has never been anything but a pinata; its best value comes from being busted, not preserved.

Exhibit A for Sequoia is Jan Koum. Back in the day, Koum was the definition of an underdog: Ukrainian immigrant; raised by a single mother; relied on food stamps as a teenager; dropped out of college; and rejected for a job at Facebook. But Koum had a burning vision for a messaging app that walked the talk on privacy, security and simplicity.?

Sequoia invested $60 million with Koum, as the only outside investor in his start-up company. When Koum and his co-founder sold WhatsApp to Facebook in 2014, Sequoia’s stake was worth $3 billion.

Pro tip: Bet on the defiantly determined.

If you want to go deeper on how to bring a venture mindset to your organizational setting—be it corporate, government, academia or healthcare—check out the new book The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth by Ilya Strebulaev and Alex Dang.

The authors help readers unlearn the small-ball thinking that keeps too many leaders tethered to mediocre results.

Make no mistake: Embracing a venture mindset is not for the half-hearted. Indeed, it takes an elite level of discipline and discernment to over-prepare for meetings, to fight-club one’s ideas and to unleash the underdogs.

But the pros know this wisdom all too well: the hardest things typically unlock the greatest gains.

Ryan Hays is author of the book Strategists First: How to Defeat the Strategy Trap. He serves as executive vice president and chief innovation and strategy officer at the University of Cincinnati.